2025 Outlook From Rob Anderson

Dive into the latest market trends with Jose Torres and Rob Anderson as they discuss U.S. sector strategies, post-election impacts, and macroeconomic factors shaping the investment landscape. Gain expert insights on market positioning, cyclical leadership, and what to watch for in the coming year.

Summary – IBKR Podcasts Ep. 216

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jose Torres  

Hello everyone. And welcome to this episode of Interactive Brokers Podcast, IBKR. I’m joined today with Rob Anderson of Ned Davis Research. How are you doing today, Rob? 

Rob Anderson  

I’m good. Thanks for having me. 

Jose Torres  

Absolutely. It’s a pleasure. Ladies and gentlemen, Rob Anderson is a U.S. sector strategist at Ned Davis Research. He’s a member of the firm’s strategy team, focusing primarily on U.S. equity sectors. His research is used for publications covering Ned Davis Research’s sector strategy and U.S. strategy products. 

Rob earned his Bachelor of Science degree in Banking and Finance from the University of Missouri and received a Master of Business Administration (MBA) degree from Webster University in St. Louis, Missouri. Rob is a CFA Charterholder and is a member of the CFA Institute. And we are happy to welcome Rob and talk about U.S. sectors and all things markets today. 

Rob Anderson  

Yeah, I’m happy to be here. Thanks for the invite. Excited for the conversation. 

Jose Torres  

Terrific, terrific. So Rob, coming off of the election, we have a red sweep, former President Trump back in the Oval Office, majority for the GOP in the Senate, slimmer majority in the House. How does that backdrop help or hurt U.S. equities? 

Rob Anderson  

Yeah, I think the initial reaction that we’ve seen is pretty similar to what we saw in 2016. As far as stocks performing pretty well. And, from a leadership perspective too, it’s looked pretty similar where we’ve had a lot of cyclical sector leaderships and defensive sectors have been lagging. 

Sectors like financials and energy have performed really well with the hopes that we get some deregulation from Trump. And I think that makes a lot of sense. And those are also sectors that could benefit from faster economic growth, as well, from some of Trump’s policy. 

I think you’ve got to ask yourself the question now, how long does this initial Trump trade last? And looking back against 2016 really the energy in financials trades faded pretty early. They lasted through mid-December and then both of those sectors started falling off and underperforming. 

So I think, that’s a good kind of warning where, you know, the market’s gonna probably start focusing on other things other than the election over the near term. And that’s something to keep in mind. But I do think going into next year, Trump policy is going to be an important driver for the market, especially where that policy is focused first. 

Back in 2017, taxes was the focus initially. This year, taxes will probably be focused, but, also trade. Tariffs are gonna probably come into effect pretty quick. 

And, tariffs didn’t really get going during his first term until about 2018, 2019. So I think that’s a difference and that’s a risk for the markets where, you know, next year could potentially be volatile because of that. 

Jose Torres  

That’s interesting. So I’ve been writing a lot of my pieces. We can have more upside in equities, but not without Trump bumps along the way. 

Rob Anderson  

Yeah, I like that. 

Jose Torres  

Yeah. Not just Trump, but also a lot of his cabinet members, they have a tendency to express how they feel when they feel like it, right? 

They’re more transparent. In Trump 1.0, we saw the president talk about really interesting things that drove volatility while the market was open, right? Geopolitics as well. So I totally agree with you in terms of some bumpiness next year. 

And usually in the third year of a bull market, we do tend to see some kind of volatility, especially like with the valuations where they are. And another source of volatility, I think, Rob, can come from inflation rates and the Fed, particularly against the backdrop of those tariffs and potential impacts of immigration. 

Also fiscal deficits, fiscal stimulus. What’s gonna happen with the IRS? All of the above. There’s just so many different things to talk about. 

How are you thinking about the Fed rates and inflation? 

Rob Anderson  

Yeah, starting with interest rates, we’ve seen a pretty big move in the 10 year. I think mid-September we were about 3.6, now we’re, approaching, 4.5%, that’s a pretty big move. One of the things that we tracked NDR is, how fast the change in interest rates are happening. 

The market can absorb higher rates if it happens gradually. When you get moves like this, where you could see a big jump, it happens over a pretty short period of time. 

That’s when the market can run into some issues. And again, given the backdrop of higher valuations, like you mentioned, I think that’s a risk for next year. I think bigger picture, you know, inflation expectations haven’t really broken out to the upside. I think if that happened, that would be a pretty big risk, a risk for longer term interest rates, as well. 

The framework that we kind of use at NDR as far as the Fed goes, and a fed as far as equities goes is, how fast is the Fed moving? 

It might seem on the face, that if the Fed is cutting rates rapidly, that should be a good backdrop for stocks. But what we have found is that stocks tend to perform better when the Fed is moving at a more measured pace. 

They’re cutting rates slowly. Stocks have tended to do better when that’s the case. Leadership has tended to be a little bit more cyclical when that’s the case. And, the reason for that is when the fed is cutting fast, it’s usually in response to something. There’s a crisis. 

There’s the economy’s weak, there’s issues in the banking sector, whatever. So they’re responding. A lot of times they’re responding too late. The economy falls into a recession. Stocks don’t do very good. But when the Fed is able to cut slowly, they’re doing that because the economy is resilient, and that’s our base case for next year. 

Our macro team expects a rate cut in December and then three more cuts next year. So that’s a pretty slow, deliberate pace from the Fed, and I think ultimately that should be a pretty good backdrop for stocks next year. 

Jose Torres  

Yeah I totally agree. Know, when you saw during COVID when the Fed, cut immediately down to zero and that was a crisis kind of situation we’ve also seen that back in prior to the great financial crisis yeah, we, I’ve been writing also about, a slow walk down the monetary policy stairs rather than a sprint down, in fact. 

This morning it is November 22nd, ladies and gentlemen, we got the flash PMIs from the U.S. and the EU and the Euro is doing really poorly in the last six to eight weeks or so against the dollar. And part of that is, there, there’s expectations that those economies are going to perform poorly against the backdrop of those tariffs especially since they’re really export oriented. 

And that backdrop, however, with tech here in the U.S., turning back to stateside activity, here in the U.S., technology has really been a huge driver of the gains, not just in 24, but also in 23, the magnificent 7 stocks, we all know their names but you mentioned cyclical leadership, especially on the walk down from the Fed. 

How are you thinking about positioning into next year? 

Rob Anderson  

Currently we are bullish on stocks. We’ve been bullish all year on a relative basis. We favor stocks over bonding cash. So we’re overweight. Max overweight stocks right now. What I do at NDR is I’m responsible for the positioning within US equity. We have a framework where we have a call on all 11 GIC sectors for the S&P 500. 

And currently we’re overweight energy, financials and Consumer Discretionary and Underweight Healthcare and Materials. And that positioning is in line with our model. So all of the calls at NDR are backed by quantitative models. And our sector model has shifted pretty decisively cyclical over the last few weeks. 

So the positioning’s in line with the model and It’s also in line with post-election tendencies where post-election you do tend to get a relief rally when, some of that uncertainty that it clouded the market. Pre-election is lifted and leadership does tend to be more cyclical post-election. 

And that and that cyclical leadership tends to carry into the post-election year as well. Really strong cyclical leadership the first half of the post election year. That’s how we’re positioned and some of the reasoning behind that as well. 

Jose Torres  

And turning back to the Magnificent Seven and valuations, how does valuation fit into that framework? And by the way, the calls have been, pretty on the money when you look at the Russell, coming in on an all-time high. Last saw these prices was back in 2021. 

The Dow Jones also cyclically oriented index has also been performing really well. Better than the S&P and the Nasdaq and the Qs in the last few weeks or so. 

But how are you thinking about mega caps and valuations and how that sort of fits into that framework? 

Rob Anderson  

Yeah yeah, valuations aren’t cheap, obviously. Just like looking at the PE ratio, for example, for the S&P 500 on a trailing basis, you’re at about 29 versus an average of 23. And you can try to rationalize to yourself okay, some of this is skewed by the mega caps. 

But even when you look at the median PE ratio you’re at 27 and going back to 1960, you were higher in 99, you were higher in 2021. But that was it, right? It’s hard to rationalize that we’re cheap at these prices. You can’t really do it. But I think the question is, okay, we’re expensive. 

What do you do with that information, right? We’re expensive coming into this year and stocks are up, 25%. So obviously, everybody knows valuation is not a great timing tool. I think what you can do with that information is shift your expectations on what kind of returns you should expect going forward. 

Probably not going to get 20 percent next year again. But at the same time at NDR we use what we call a 360 degree approach. Fundamentals is one of the pillars. So valuations, earning growth, all that’s really important. But we also look at things like sentiment, technicals, and macro. 

And I think we talked about the macro backdrop. I think it’s pretty favorable for stocks going into next year. You look at the technical picture again. I think technicals are still pretty bullish for stocks. You’re not at the point now where you want to get out of US stocks just yet, I don’t think. 

Valuations, I think given where they are, something you want to keep in the back of your head that, when things go south. You probably want to, consider taking risk off the table but right now I don’t think we’re there yet. 

Jose Torres  

What do you mean we can’t get another 20% year that’s all we’re used to these days? 

Rob Anderson  

I’m not saying we can’t, I’m just saying given where we are, I wouldn’t bank on it but, it’s the same time, the Mag 7, I wouldn’t bet against them either they’re expensive but, uh, Nvidia reported earlier this week, so all Mag 7 components have reported, and, they’ve all beat on bottom line estimates, some of the responses from the market weren’t great But most of them are up since reporting I think the risk there is the risk to the overall market as well going into next year is that earnings are expected to decelerate pretty rapidly for the Mag 7 I think Tesla’s an exception where they’re expected to actually see earnings accelerate but everything else is going to see pretty significant deceleration. 

And that, that might be an underappreciated risk, I think given the run that they’ve had and, the massive amount of CapEx that these companies have spent, something that we looked at is, what factors perform well during What isn’t performing well is high cap exes sales ratios and all these companies have seen you know, just massive increases in cap ex I think that’s a risk you now even going back to 20, 22. 

You know that bear market was tech led and if you remember back then, it was meta. which was investing metaverse And their stock at absolutely killed during the 20, 22 bear market where, it was down close to 60%, a little over 60%, I think during that bear market, it all makes seven stocks other than Apple underperformed in 2022. 

I think the combination of high valuations with, the high level of CapEx and R&D spending, I think that’s could be a risk going forward when we do eventually get the next downturn. But again we’re not there yet. So I don’t think you want to bail on these guys yet either. 

Jose Torres  

So what do you think is a reasonable return to expect, let’s say, in the next five years? And the reason I asked that question is because we have these rates that are quite high based on what we’re used to in the last post great financial crisis kind of a mindset. 

So some folks look at the two year here at 437, the ten year at 441, if we’re only expecting equity gains, say of 8%, then if I’m parked in the two year I’m getting more than half of that, without taking much of a risk. Or theoretically, no risk at all. What kind of returns do you think we should expect maybe next year in the next five years? 

Rob Anderson  

We haven’t given our 2025 outlook. So our chief equity strategist is responsible for our call there. But I think I would expect five to 10 percent will probably be where he falls in for the gains expected in 2025. I think looking out next three, five years, we’re still in a secular bull market. 

This started after the GFC and we’re going into the 15th year now. The average secular bull lasts, about 14 years. Now there’s some variance in there, but still, we’re probably in the later innings of the secular bull market. I think that it probably continues for a while longer. 

Maybe for the next three, four or five years, we remain in that secular bull market and we can still earn above average returns. Think, somewhere in the neighborhood of, 10 to, 10 to 15%. I don’t want to throw numbers really out there cause it’s, it’s guess work, but, as long as we’re in the secular bull market, I think you can expect pretty healthy returns. 

But again, given where valuations are, given where earnings growth is, given, economic growth. I think, it all kind of points to the fact, Given the duration of this bull market, it all kind of points to the fact that we are in the later stages. And to your point about the interest rates, there’s options now, right? 

There were no alternatives for a very long time. Now we have alternatives. I think given that backdrop that the bull market is probably on a borrowed time at this point, but again, all this is scary when you talk about it. 

You don’t want to bail too early either because that’s a massive risk, right? 

We talked about it. If you were scared off evaluations earlier in the year, you’re probably kicking yourself right now. It’s important. I think it’s a really important conversation to have and it’s really important to keep in the back of your mind. But I, I do, like I said, I think it’s probably too early to bail on stocks just yet. 

Jose Torres  

Yeah. Since 2022, Rob, a lot of us in the Economist camp were calling for recessions. We thought that the economic data was souring in certain months or in quarters, Rob. And then the economic activity would recover the same way the Investors buy the dip in the S&P 500 and you just see it go back. 

In fact, it’s retail sales. We’ve seen that so many times this year and last year, where it seemed like consumers just really took it easy, didn’t shop, were looking to replenish their savings. And some folks thought, Oh, wow, this is a downturn. The consumer is over. 

Remember that Fed research from San Francisco in 2023 about excess savings and all that? So it’s really been a remarkable consumer spending expansion, in my view, driven by fiscal stimulus, tight labor market and the stock market, which has just been terrific above right now up 26 percent year to date. Last year, I think it was right around 25, 24. Just amazing returns. 

Talking about alternatives. Something I noticed in other parts of the world, Europe, Japan, those economies aren’t doing that great. But the stocks there also doing phenomenal. They’re rallying. 

How do you feel about international allocations across regions? Do you think it’s maybe justifiable, warranted to have a portion in Europe, Japan, China? China actually, their economy has been performing poorly, but their markets have also been bad. 

So I guess a lot to unpack there. Generally speaking, what do you think about international stocks? 

Rob Anderson  

So our global team has a seven way framework that we use for the regional equity allocation. And those regions include the U.S. Europe, ex U.K., emerging markets, PacificXJapan, UK, Japan, and Canada. And right now we are overweight the U.S., right? Despite the valuations, there’s a lot to like in the U. 

S., and the other region that we’re overweight is PacificXJapan. And from a valuation perspective, a lot of these regions are not cheap either. I don’t think Pacific X Japan is particularly cheap, although I think there are countries within that region that are cheap. 

The biggest country there is Australia, and I looked at Australia’s valuations. They don’t seem like particularly cheap. Hong Kong is the second biggest country in that region. And valuations there are a little more attractive, similar to China. 

it’s not just the fundamentals, it’s the sentiment, it’s the macro, it’s the technicals. And that’s the reason why our global team likes that region is all that is working in favor of those countries right now. 

Jose Torres  

All right, ladies and gentlemen, that’s Rob Anderson of Ned Davis Research. Thanks so much for joining Rob. 

Rob Anderson  

Thank you. Appreciate it Jose. 

Jose Torres  

Folks, I’ll see you next time on our next episode of Interactive Brokers, IBKR Podcast. Don’t forget to hit subscribe and access our podcasts. 

Until next time. Thank you. 

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